Connective Financing: Chinese Infrastructure Projects and the Diffusion of Economic Activity in Developing Countries

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Connective Financing: Chinese Infrastructure Projects and the Diffusion of Economic Activity in Developing Countries

Bluhm, Richard; Dreher, Axel; Fuchs, Andreas; Parks, Bradley; Strange, Austin; Tierney, Michael

Overall review

This article analyses the impact of development projects on the geographic distribution of economic activity within low-income and middle-income countries while focusing on Chinese infrastructure investments. As a matter of fact, China has recently become a major financier of economic infrastructure in Africa, Asia, Latin America, the Middle East, and Central and Eastern Europe, and it is unclear if these investments diffuse or concentrate economic activity and thus whether Chinese development projects widen or narrow inequalities within low and middle-income countries. Indeed, the perception on the consequences of Chinese development projects is rather ambiguous. However, many developing countries point out that China is more willing and able to finance infrastructure projects at a time when Western donors and lenders are not.

China is a unique source of development finance given its revealed preference for funding “connective infrastructure” at home and abroad. Economic theory suggests that investment in “connective infrastructure” can increase the mobility of people, goods and capital, which begs the broader question of whether Chinese Government-financed connective infrastructure might help developing countries escape inefficient spatial equilibria—that is, transition away from the status quo of excessive concentration of economic activity in a small number of cities or regions.

Methodology and Results in short

The research report introduces a dataset of geo-located Chinese Government-financed projects in 138 countries between 2000 and 2014, and analyzes the effects of these projects on the spatial distribution of economic activity within host countries.

The result suggests that Chinese development projects in general and Chinese transportation projects in particular, reduce economic inequality within and between subnational localities. Chinese investments in “connective infrastructure” produce positive economic spillovers that lead to a more equal distribution of economic activity in the localities where they are implemented. However, Chinese development projects, including infrastructure projects, produce a number of negative externalities, including local corruption, environmental degradation, and lower levels of trade union participation. Therefore, Chinese connective financing may help narrow spatial inequalities, but its overall impact is a more complex question.

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